Equalization will wither

When I first went to the States in 1985 to university as a 17 year old freshman, I remember having long talks with political science majors in the dorm late into the night. I remember thinking some of the crazy ideas (to me at the time) they were putting out there such as ‘workfare’ and, somewhat paradoxically the merits of running up the debt to keep taxes low (this was in the Reagan years).

Just about everything they advocated came to pass eventually. My point is that the ideas debated in universities today find their way into the policy making of tomorrow.

In reality, equalization transfers cash from taxpayers in high-cost provinces to governments in lower-cost provinces. The program also allows for lavishly subsidized services where they ought not to exist and thus acts as an incentive to poor provincial policy.

Mark Milke is the director of research for the Frontier Centre for Public Policy

This is the smart new line of thinking among the growing anti-Equalization crowd. Before the arguments were based on trying to make the point that Equalization is actually a disincentive for provinces to push for cost containment and economic development. That didn’t get much traction so the new line out of western academia is that Equalization is fundamentally unfair to the rich provinces. I didn’t post his full comments here but you should read it.

And if that doesn’t work, they will try other arguments.

The point is that there are clear warning signs that the Equalization program as we know it likely to be radically alterned in the near future (Bernard Lord’s constitutional protest notwithstanding). I have argued that for years there already has been an unholy quid pro quo where the richer provinces get the bulk of the economic-development-related dollars from the Feds (EI, Invest in Canada promotion, TPC, etc.) and the poor provinces get Equalization but the thinking out of the West is even more blantant.

What they want is a full reset. Take the poor provinces of the equalization life support, let the migration begin in droves, reset government spending around a much lower equilibrium point in the poor provinces.

I have also predicted here that by 2040 or so there will be a ‘Royal Commission on the future of the Maritimes’ that leads to the amalgamation of the three provinces and a radically reduced government and subsidy model for the region. Many folks scoff at this prediction and I may be wrong but I watch trends as much as anyone and with population stagnant and declining and the cost of government rising by upwards of three times the rate of inflation – increasing amounts funded by federal transfers – eventually something’s gotta give.

I have also said this timetable could be accelerated if there is a prolonged recession and economic stagnation in Canada. We may be approaching that time.

That is why I agreed with the self-sufficiency agenda. It was the right strategy – 10 years too late. During the Bernard Lord period in office (and the late Liberals after the budget balancing act of the early mid 1990s), we had a golden opportunity to build a new economic development model in the province based on fostering the growth of higher wage industries and keeping our cost structure moderate – weaning off Equalization. Instead we didn’t foster new industries and we spent like drunken sailors. The NB budget rose as fast as the have provinces during that period even though our population stagnated.

I don’t have a crystal ball but it doesn’t look too good from the perspective of government. $800 million deficit in NB, lower tax base to pull from, the federal government warning about serious belt tightening to come and not as much business investment across North America for which to compete. Think about it. Just five years ago, there was such a labour shortage in the US – we could have attracted dozens of wind and solar manufacturers and no one would have noticed – now those companies are the most sought after economic development projects in North America. I could say the same for data centres.

I’ll end for now but any government in this province that thinks Equalization is going to save their bacon moving forward is mistaken.

26 Responses to Equalization will wither

You can’t change equalization, its in the Charter, and as you may have noticed the Charter isn’t easy to alter. They may alter the money going out, as they did with Martin, but I suspect they do that anyway.
The MAIN reason, and one the anti french here won’t like, is that the best friend for equalization has been Quebec. Quebecers are like their french ancestors, we know they are much more involved in politics and much more savvy to what is going on. I suspect that’s why talk of separation has subsided somewhat as the government posts big losses and big industry is fleeing as fast as in NB.
These things are changing all over the world, what you forget is how much what happens in the US affects canada-for good or bad. That means polically too, its almost a given that canadian political trends are abaout four years behind the US.
I do suspect change IS coming, but the gloom and doom may be just like talk of the apocolypse-always predicted,never arriving. There HAVE been upward changes, particularly in latin american countries where more populist leaders have more power. We MAY see that in Canada, clearly especially in NB we are seeing the thorough disgust with politicians-and that extents federally. What that may lead to is anybody’s guess.
However, given Lord’s travel schedule I have to disagree that the fact that foreign investment DIDN”T come to NB isnt something you can just lay at governments feet. When you get stood up at the prom its not always YOUR fault.

Rural communities are becoming a lot more receptive to foreign investment, however the major sticking point if when the government opts to subsidize or provide incentives to encourage relocation. You continually hear people moan and groan that the government should look after their own people first, and I agree to an extent, but there has to be a carrot in it for major industrial players.

In Miramichi (one of the least progressive areas of NI in terms of cultural tolerance) has been pushing hard to sell their airport to Chinese investors and have been trying to sell the city in general to individuals from North-West China. This turn of events is getting a lot of support from the community and organizations have been set up to ease the cultural transition for those who decide to relocate to Miramichi. This has very little to do with David’s post, however I agree with Mikel that things certainly are changing. Miramichi is going from a former “smelly mill town” to an attractive community which is getting incrementally more progressive and open minded in terms of who we’d like to do business with and the types of business being done. As someone who spent the first 18 years of my life there, I never thought I’d see the day.

As difficult as it could be to change the Charter, here in Alberta it is very difficult for the average Joe to accept the idea that the provincial government may have to cut expenses in health and education and keep sending billions of dollars to support the “life style” of Quebec and Atlantic Canada.

There is no need to change the Charter. You just change the formula and/or the amounts to be transfered. Been done before and can be done again. Alberta, however, will not be the driver on this issue; it’ll be Ontario. The downward ratcheting will be relatively slow and lead to a gradual erosion of services to residents of provinces receiving equalization.

“and lead to a gradual erosion of services to residents of provinces receiving equalization.”
That is if provinces receiving equalization continue doing business as usual. And, as the Alberta Minister of Finance implied in the article above, that will make the system “fair” in more ways. For example, that could bring the per-capita number of doctors in “have” provinces closer to those in “have-not” provinces.

I love it when Canadians start talking us/them. What is an Albertan? What is a New Brunswicker? I was born in Alberta and have lived most of my life in NB, what the hell am I? Do I get a cheque from the AB gov’t because its my birthright? Look at NF, geez now they have money they think they are all that, remember 30 years ago (or less) when they had nothing but sadness over dwindling cod, gimmee gimmee. I think people forget we are allowed to travel and live anywhere at anytime in this great country and we should expect that wherever we go we should receive a comparatively similar socio-economic environment. Those Albertans are going to have a different story in say 30 years when the world has passed oily sand by and there is little else there to drive the economy like it is now.

Your raise some very valid observations about the nature of Equalization in Confederation. Although the principle of Equalization is in the Constitution Act (not the Charter), it is only the principle not the formula. However, this principle is important to the rights of individuals as citizens of Canada, not as residents of a particular province. As citizens of Canada, we are entitled to equitable levels of key government services (health care, education) at equitable levels of taxation.

We can squabble over what one province says or what another does, but Equalization is not meant to serve provincial interests; it is meant to fulfil the rights we have as Canadian citizens.

“I think people forget we are allowed to travel and live anywhere at anytime in this great country and we should expect that wherever we go we should receive a comparatively similar socio-economic environment.”

>> That’s not quite true. You need to remember that in Canada we have such things as trade and labour barriers. And if you dig deep enough, you will be surprised when you find out in which provinces those barriers are higher.

I think that the main point here is precisely what the Alberta Minister of Finance said, i.e. that equalization transfers are a big deterrent of productivity improvement in receiving provinces.

“As citizens of Canada, we are entitled to equitable levels of key government services (health care, education) at equitable levels of taxation.”

>> That is exactly the point of many of those who are against equalization transfers. If the per capita number of doctors in Ontario is lower than that in New Brunswick (just to mention two provinces), it is hard to say that the system is being effective in ensuring equitable levels of government services across Canada.

I think it is important to properly define comparability. I have done a fair amount of research into both equalization and health care in Canada (two fairly major research reports on the latter) and there is no correlation in Canada between health outcomes and blunt instrument measures such as doctors per capita. In fact, Atlantic Canada which has more doctors per capita has much lower health outcomes so without controlling for other variables, Albertans should be happy they have less doctors.

But the real issue that I raise (because the broader issue of comparability is harder to tackle) is that the way things are set up now the rich provinces can invest far more into economic development investments. Ontario, for example, the provincial government, spends something like 9 times as much on R&D than New Brunswick. If you throw in the fact that the federal government spends more – even per capita – on economic development-related investments in Ontario (not sure about Alberta) you start to understand my position. There is a de facto reality in this province that the poor provinces have equalization so we don’t have to waste as much time thinking about economic development. That is both a provincial and federal reality. Why doesn’t NB spend 9 times more per capita now on R&D (to meet the level of Ontario?) – you tell me but I think it is wrapped up in a complicated mix of factors that include the safety net (equalization) and the public never really believing that economic development is possible in New Brunsiwck.

Unless you believe like that UCalgary prof that New Brunswickers are inherently lazy (in the DNA – he found evidence of our laziness in his research of 17th century New Brunswick), then we have to look at causality in a different way.

I want equalization restructured as primarily a short term program to help balance things during difficult periods (say 20-30 years) but that is should be tied (like the EU and Ireland or Portugal) to longer term economic revitalization strategies to beef up the tax base and lead to self-sufficiency. I get little interest in this idea – academics like the UdeM prof sneer at my idea saying “that’s not the point of equalization” but I am sticking to my guns on this one.

Ultimately it will be good for the whole country if there are fairly strong economies across the country. Long term conomic balkanization will lead to bad outcomes from a national perspective.

I tried to get the primary source a couple of years ago but I can’t remember if it was out-of-print or too costly. I take my quote from the eminent historian Margaret Conrad in her essay entited “History does Matter. The future of the past in Atlantic Canada” in the Literary Review of Canada. Conrad says “My favourite statement is by Barry Cooper, a political scientist based at the University of Calgary, who argued, in 2002, as a matter of “fact,” that “stagnation and decadence remain the most prominent features of pre-modern communal life to have survived into the present” in the Maritimes.”

“Albertans should be happy they have less doctors.”
>> That is hardly a good argument in favour of equalization. And if Atlantic Canada has lower health outcomes with more DOCTORS, that is in fact a clear sign of low productivity in the region’s health care sector.

“But the real issue that I raise (…) is that the way things are set up now the rich provinces can invest far more into economic development investments.”
>> This is where we disagree (at least in part). Nobody can disagree that it will be good for everyone if there are fairly strong economies across the country. But I believe (and a lot of people in provinces like Alberta and Ontario do as well) that the current equalization system introduces distortions in the Canadian economy and discourages the adoption of sound policies by the governments of “have not” provinces. We all know about the negative economy effects of “free money” (at the macro, micro, and personal level).

“that is in fact a clear sign of low productivity in the region’s health care sector.”

Poorer health outcomes are not uncommon in North America where incomes are lower. That is the most likely explanation here as it fits the pattern – lower median incomes, poorer health. By contrast, there is no evidence that the health care system in Atlantic Canada is less productive.

“discourages the adoption of sound policies by the governments of “have not” provinces”

Then what explains the failure to adopt sound policies in wealthier provinces? I have lived in AB BC ON QC and NB – The ‘policies’ don’t vary that much from province to province. The main difference between AB and NB is oil.

“there is no evidence that the health care system in Atlantic Canada is less productive.”
>> What best evidence is needed than lower health outcomes with higher labour inputs?

“The ‘policies’ don’t vary that much from province to province.”
>> I have lived in four of the five provinces that you mentioned (plus two other Atlantic provinces), and worked for the governments of three of them. The differences go well beyond oil.

I think that I need to make clear that I am not a disgruntled Albertan. In fact, I was not even born in Alberta. I live in this province now but I may not even be here next year. Like David, I believe that it will be good for everyone if there are fairly strong economies across the country. The difference is that, based on what I have seen across the country, I strongly believe that the equalization system (as it is now) is the wrong way to achieve this. And the most worrisome part is that there seems to be a feeling of entitlement in the “have not” provinces.

“What best evidence is needed than lower health outcomes with higher labour inputs”

You have made the claim – you need to back it up. I am doubtful that you will find data to support significant differences in health care efficiences in different regions. Again you need to factor in the obvious – studies showing that health is affected by income level.

“I think that I need to make clear that I am not a disgruntled Albertan.”

I don’t give a rat’s ass where you are from. Point is you made a statement re policy decisions that you cannot back up. You have made a number of claims. Back them up with some unconfounded data or we’ll have to conclude you don’t know what you are talking about.

“You have made the claim – you need to back it up. ”
>> Economics 101: Productivity = The amount of output per unit of input (labor, equipment, and capital).

“You have made a number of claims. Back them up with some unconfounded data or we’ll have to conclude you don’t know what you are talking about.”
>> I have more to do than fishing for statements from Econ101 and PolSci101 textbooks. I am sorry, but you will have to put aside your preconceived ideas and explore the subject a little bit more in depth.

“I don’t give a rat’s ass where you are from”
>> When people starts losing civility, it’s a sign that they are running out of arguments.

“We believe in one Canada; with many Provinces; and a Federal Parliament beside. Where each Province, accountable for its own and to its own, governs free of federal interference within its assigned areas of responsibility.

“We believe that Ottawa’s current practices of governance and wealth transfer are intolerable and pernicious, and should end now.

“We believe that Constitutional and conventional checks and balances should be made a more meaningful part of our political life.

“With these beliefs we submit these resolutions, considered and adopted by a majority of the Calgary Congress convened in Calgary, September, 2006.”

Well, that’s no argument. You must have failed economics. You need to factor in all the variables. You need to include the known relationship of income to health outcomes into your analysis. There are no unconfounded data showing that health care is less efficient in Atlantic Canada; as incomes are lower here, health outcomes are poorer.

“explore the subject a little bit more in depth”

I think the shoe is on the other foot, bud. You are just one of many ill-educated libertarians. A philosophy in need of an acquaintance to data and historical fact.

“You are just one of many ill-educated libertarians.”
>> That’s another tool used by those who lack strong arguments: putting labels on people who don’t agree with their ideas.

Anyway, this blog thread is getting tiresome, so I will end with a comment/question (and again a reminder that I am not an Albertan, and that I could move back to Atlantic Canada or Quebec sooner than expected):
Are “have not” provinces spending properly the money sent to Ottawa by taxpayers from “have” provinces? If the answer is yes, well, there is no point in David keeping this blog because all the problems are solved. But if the answer is no, what makes us think that taxpayers from “have” provinces should be happy with the preservation of the system?

In answering these questions, we need to remember one thing: although transfers are in theory meant to ensure that citizens across the country have access to equal levels of government services such as health and education, in practice they release provincial funds for expenditures in other areas.

Again, the truth is somewhere in between. For health variables, you have to define it further. You live in ‘gasoline alley’ around Windsor, Ontario and your health outcomes will be as poor as New Brunswick. A province is a political construct, not a geographical one. Within every province variables are quite high.

I do have to agree that the difference between Alberta and NB goes FAR beyond oil. There are pretty strong similarities in ALL of Canada though, we are essentially a business run society. At the municipal levels this is very clear. At the provincial level it is quite complex and a province will vary simply between those who happen to be Premier. Who would have thought a millionaire businessman like Danny WIlliams would be talking about socializing industry?

I’ve known many people who have worked for the NB government, and criticisms can vary widely. I’ve heard people who claim the provincial was simply an arm of the feds. I’ve heard that Irving runs them, that civil servants run them, and that Quebec runs it. I suspect it depends on what specific area is being discussed.

As for equalization, almost no province that pays into it likes it. There are ALWAYS numerous groups out west that make noise, because in Canada the best way to get reactions is to badmouth other parts of Canada. Blame the french, blame the natives, blame ontario, blame the senate, and on and on.

There ARE ways to make equalization more efficient. And like David often says, its BAD for the east because it gives the feds an out on investment. But what would alberta do if New Brunswick started charging people a fee for their education if they moved to work in Alberta? Unfortunately, Canada is a ‘nation’ in most of the worst aspects of nationhood, and just a collection of provinces in others.

Health is a complicated subject, but we know there are bad habits in the WASP communities as far as eating habits go, and its an aging society. Politically, there’s a reason that virtually NO federal initiatives or parties have begun in the east since 1867-when Nova Scotia tried to annul confederation. EVERY province is quite unique, and even within each province there is quite a bit of variety. Politically NB IS different simply because the players are different. In Nova Scotia and PEI they don’t have to worry about Irvings or McCains or bilingualism-and they aren’t right next door to Quebec or the US.

“That’s another tool used by those who lack strong arguments: putting labels on people who don’t agree with their ideas.”

My friend, I would be happy to agree with your ideas, if only you would offer up some data in support of them. It is well-established, if you look at the health literature, that low incomes in North America are correlated with poorer health outcomes. As median incomes in Atlantic Canada are lower than in more prosperous regions, health outcomes will be poorer. By contrast, there are no data of which I am aware that the efficiencies of the health care delivery systems in Atlantic Canada are lower than those of other regions.

The main difference (not the only difference) between NB and AB is oil. The decline in oil prices led to fiscal difficulties in AB; were those oil revenues to disappear, then many ‘brilliant’ business persons in AB would go bankrupt. AB has thrown away hundreds of millions of dollars in failed enterprises and poor policy decisions over the past few decades. NB has done the same thing – on a lesser scale because there is less money to throw away. Both regions have problems to solve, but lets put the focus on the problems, not phony sermonizing about poor policy decisions here. Piss-poor policy decisions have been made in abundance in every province. But oil has protected ABers from the consequences of theirs, at least for a while.

I don’t spend a lot of time thinking about this stuff but there is something to the idea of country – what is a country? I have said before the most powerful example was a guy I heard one time on a podcast saying that if Iraq had Canada’s oil royalty distribution system there would be civil war over it. We have a national government that generates its own revenue from Canadians and distributes it pursuant to its national goals. If someone else’s vision of Canada is that poor province should collapse while rich provinces fall over themselves in revenue – that is their perogative. I think there is a longer term solution that involves more serious efforts at economic development in poor regions (don’t read this as cranking up subsidies -read hundreds of my posts for real ideas about economic development) which would reduce the need for equalization. But in the end I think it is a worthy national objective to have national policies aimed at ensuring that all Canadians have access to comparable levels of fundamental public services.